Classification of Costs Costs classified as to relation to a product Manufacturing costs or product costs Non-Manufacturing costs or period costs In direct materials, timely purchasing is important; it should not be too early or too late. Too early purchasing will result to higher material handling costs while delay in purchases might result to missed sales and dissatisfied customers. These costs (selling and administrative expenses) are expensed once incurred. They do not become part of the cost of the finished product. Labor costs are different from salaries paid to salesmen and office employees. This cost represents those paid to workers in the factory be it directly or indirectly working on the product (direct labor cost &indirect labor cost) Factory overhead are cost that cannot be traced to the finished product but they are still considered as product cost. It is composed of costs of different behavior; some are fixed, others are either variable or mixed costs. Manufacturing/ product cost vs Non-manufacturing or period cost If we are to compare product from period cost, product cost are inventoriable or becomes part of the asset section while period cost are considered as outright expense. Product cost will be transferred to cost of goods sold (expense) once the related inventory was sold. Costs classified as to variability Variable costs Fixed costs It is important to know the behavior of per unit and total cost. The behavior of fixed cost is the opposite of variable cost. For variable cost (e.g., direct material and direct labor), total cost increases as production increases. Meaning, the higher the number of unit produced, the higher the total variable cost. As to the total fixed cost, it remains unchanged or is constant within the relevant range. Meaning, whether there is an increase or decrease in production, total fixed cost is just the same (e.g., Fixed cost for 100,000 units produced P 100,000 while Fixed cost for 50,000 units produced P 100,000) It is important to note that only the total variable cost varies directly with the changes in production. The per unit variable cost (e.g., P 5/ unit or P 2 per direct labor hour) is considered constant (does not change) within the relevant range. Meaning, whether you produced more or less units, the variable cost per unit remains unchanged. On the other hand, fixed cost per unit varies inversely with the changes in production. Meaning as production increases, fixed cost per unit decreases and vice-versa (e.g., Fixed cost for 100,000 units produced P 1 while Fixed cost for 50,000 units produced P 2) Costs classified as to variability Mixed costs Partly variable and partly fixed cost. As stated in the module, it varies, but not directly with the changes in the level of production. The partly variable cost was the once that reacts to the changes in the production with the fixed part remaining constant. As a result, the total mixed cost increases with the changes in the level of production within the relevant range. Other example of mixed cost is the postpaid plans wherein there is a fixed plan to be paid by the subscriber but once they deviate from the inclusions of the plan, or exceed the limit stated, there is an additional cost incurred. Costs classified as to relation to manufacturing departments Direct Departmental Charges Indirect Departmental Charges From the word itself, it is directly charged to the department that incurred such cost. Meaning, there is no need for allocation since it can be conveniently identified from the department that benefited from the said cost. Usually, this account are charged (in total) to other account and later, with the use of different techniques and procedures, will be allocated to the departments that benefited from the cost using appropriate bases. It will be discussed further when we go to module about Departmentalization of Factory Overhead. Example is depreciation of factory building. First, it will be recognized in a controlling account such as Depreciation Expense - Factory Building but later, through allocation (e.g., square footage), will be allocated to the departments that are occupying the building (e.g. share in Depreciation expense of Machining, Assembly and Painting Department) Examples of this cost are direct materials and direct labor incurred by Machining Department, Costs classified to their nature as common or joint Common Costs These costs is incurred when making use of the same facilities in the processing of different products. Example is the salaries of personnel involved. At the time the salaries are incurred, the products are distinguishable from one another so that cost allocation can easily be made. Like indirect departmental cost, these costs are subject to allocation. While indirect departmental cost are allocated to the departments benefiting from the cost, common costs are allocated to the products that share in such cost. Joint Cost These costs, if compared to common cost, is indivisible because they cannot be identified to any of the products being simultaneously produced. Since costs are indivisible, the problem here is how it should be allocated to arrive at fair estimates of product cost. Costs classified as to relation to an accounting period Capital Expenditures Revenue Expenditures Based from our earlier discussion, this cost benefits more than one accounting period and is recognized as an asset when acquired. These costs benefits only the current period and is immediately recognized as expense in the period incurred. Examples of these expenditures are those related to acquisition of tangible/ fixed assets (Property, Plant and Equipment), intangible assets (Patent, copyright, trademark) and wasting assets (oil well, coal mine). Examples of such cost are salaries and wages, utilities expense, repairs and maintenance, advertising expense, sales commission, etc., We recognized the expense related to these expenditures either through usage or passage of time (depreciation expense, amortization expense, depletion expense) Costs for planning, control and analytical processes Standard costs Opportunity costs These cost will only be arrived at after carefully analyzing the past experiences and conducting researches in relation to specific cost. These cost will be compared with the actual cost incurred to determine variances/ differences. The benefit foregone by choosing the best alternative. It is relevant when choosing among alternatives for decision-making. Examples are 5 pieces of raw material to produced one unit, P 3/ unit, 2 hours per unit, 150% of direct labor cost. These are the cost that should have been incurred when producing the actual units. Example is having a P 500,000 cash to invest in a profitable business. You are choosing among leasing spaces or investing in a well-known company. By choosing to invest in a well-known company, your opportunity cost is the supposed income that will be realized had you chosen to lease the space to tenants. Costs for planning, control and analytical processes Differential costs These are costs that distinguishes one option to another. These are considered in evaluating alternatives by considering all the increases or decreases in costs that are present among alternatives. Example is deciding whether to change the form of advertisement; from newspaper and flyers to radio and social media marketing. Before arriving at a decision, the benefits associated with the cost must be determined in evaluating what option to consider. Relevant costs These are future costs that are considered in decision making, A matter is relevant if there is a change in cash flow that is caused by the decision. The change in cash flow can be: additional amounts that must be paid. a decrease in amounts that must be paid. If we are to compare differential from relevant, relevant cost are decision-specific, meaning such cost may be relevant to one situation but irrelevant to another. On the other hand, differential cost examines the effects of alternative courses of action on total costs. Costs for planning, control and analytical processes Out-of-pocket cost Controllable cost In this type of cost, there is an outflow/outlay of cash/ other assets to settle the transaction. When we talk about controllability of cost, it means that such are under the authorization of a particular person with authority. If you are a department head, there are cost within your department that you can increase or decrease depending upon your judgment. But there are also cost to which a department has no control such as those that are a result of allocation. Sunk cost This cost has already been spent/paid and cannot be recovered. These are independent of any event and should not be considered in making decisions